Gross Interest

What it is:

Gross interest is the amount of interest an account or investment earns before deducting taxes, fees or other charges. It is expressed as a percentage.

How it works (Example):

Let's assume you open a "Super Saver Savings Account" at Bank XYZ. The account advertises a 2% annual interest rate. You deposit $10,000 into the account, and after a month the bank pays you 1/12 of 2% on that $10,000, for a gross interest payment of $16.67. However, the monthly fee for maintaining the account is $5 and you have to pay a 28% federal income tax and a 5% state income tax on the interest income (which costs another $5.50), so the net interest is actually $6.17.

Why it Matters:

Gross interest can be misleading because it does not include other costs associated with owning an investment that net against the interest income. Accordingly, investors should always consider account fees, taxes and other costs when evaluating advertised interest rates or bondcoupon rates.

CONTENT LIBRARY

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